Baby steps for accountability

Publication: Business Standard, Mumbai; Date: October 17, 2010

Allowing children to handle money from an early age helps inculcate financial discipline

The best way to teach kids about money is to let them handle it early on. That’s why pocket money can be a powerful way to teach kids the basic utility of money, savings, prudent spending, budgeting, record keeping and accountability.

Parents have different opinions on when to give children pocket money. Some say not before the age of 12-14. A few say they were not given pocket money till they went to college. On the other hand, some have been very generous with their kids, starting at the age of seven-eight; yet others give out more money than their kids require.

Giving money to your kids without teaching them accountability and responsibility is like creating a bomb. It’s just a matter of time before the bomb explodes.

WHEN TO START?
There is no right age, as such, to start your child on pocket money and it will vary from child to child. Every child is different. Parents need to understand their nature to take a call. It’s up to parents to pick up these clues and understand whether the kid is ready.

One can start giving pocket money to kids starting at the age of eight-nine. Begin with giving them smaller amounts to buy a sandwich or a lemon juice at school, or buying a book from a book store. In a few months, you will figure out what they are doing with it and if they are handling the money well.

Take an example of Rahul Iyer, parent of a 12-year old girl. He started teaching his daughter about managing money in a similar way. “I have been giving money to my daughter since the age of eight in small sums. We started with Rs 100 and she has now progressed to Rs 500. This way she learnt accountability. She now keeps a record and also saves.”

It is solely parents’ decision to let kids handle money independently. Some do not give pocket money to children. Rather, they buy things that a child needs. Their argument: “Why is there a need to give pocket money? We never got it and we pay for everything that our kids need.”

There is no right or wrong formula here. It depends on your objectives and the value systems you wish to inculcate in your child. However, letting children directly deal in money will help them take mature and prudent financial decisions later in life. The key is to monitor what they are doing with it and parents must take corrective action when necessary.

HOW MUCH?
Again, there is no thumb rule on the amount a kid should receive as pocket money. It should be based on the expenses and parent’s comfort levels. However, to teach kids the value of money, one should give them a little extra than their expense, and encourage them to save the extra amount.

A simple way is to calculate the expenditure you would let them handle each day. Secondly, the amount would also depend on values you want them to learn. Accordingly, give them clear instructions on what they can and cannot do with the money. Once you do this, sit back and monitor. Varun Wadhva, a senior corporate executive, gives his eight-year old daughter Rs 20 every day. This is slightly more than the energy bar the kid is supposed to buy everyday.

“Sometimes she indulges in a burger with the money she saves in 3-4 days, and we allow it. This is a lesson for her that she needs to save prudently to fund a bigger need,” said Wadhva.

Once kids cross the age of 14, they have their own ideas about what they like to wear and things they like to have. At this age, you can set a budget for them to buy their own clothes, shoes or any personal care items. At this age, it is important that you do not give in to their demand.

Some children consistently spend their pocket money before the end of the stipulated period and go to their parents “Daddy/Mummy, can I have some more?” If you find yourself in this situation, be polite but firm in your response that they will not get a single rupee more. They must understand the message that there is nothing left if they spend all their income before time; the next time they will be careful in not spending the entire pocket money.

The writer is a certified financial planner

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